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Capitol Commentary: December 9, 2013

12/9/2013

BRADY OPINION: HARD CHOICE ON PENSIONS WAS THE RIGHT CHOICE

This week my fellow legislators and I returned to Springfield and, finally, passed long-awaited meaningful pension reform. It isn’t perfect, but it is good. What we passed was a reform package that will strengthen Illinois’ fiscal future by eliminating our largest-in-the-nation $100 billion pension system liability. It’s not fair that we had to ask retirees to accept a change in the way their benefits grow, but we were able to protect what they have earned.

Over the summer and into the fall I was proud to serve on the conference committee on pension reform. On Tuesday morning, we met one last time as a committee to hear the final details of the agreed reform, and send our report to the General Assembly. This report was the result of months of discussion, thorough analysis, and lively debate.

Voting for this reform was difficult; in fact it was perhaps one of the hardest votes I have cast in my time as a legislator. I will concede that it is not fair to ask state employees and teachers who have paid into the system, and who have upheld their end of the bargain, to make a sacrifice. However, over the last decade budgets that deferred pension payments and state leaders who have done nothing more than delay a resolution on this issue left us with no alternative.

It is ironic that we passed this reform on the same day that a judge ruled that the City of Detroit was eligible to declare bankruptcy. This move allows the city to drastically cut billions of dollars that are owed to city employees, retirees, investors and other creditors. These people will now receive only pennies on the dollar of what they are owed. In Illinois, we made a difficult decision yesterday, but it was one that ensured our state avoids a fate similar to that of Detroit.

What we did was vote to stabilize Illinois’ finances. We voted to ensure funding for essential services like education, public health, public safety, senior citizens programs and many others resources that Illinoisans depend on. A more fiscally stable Illinois also means a better environment for job creators to get down to the business of putting people back to work.

This reform promises to cut the state’s pension payments by $160 billion over the next 30 years, freeing up resources to meet other critical demands. Taxpayers would save about $1.5 billion in the first year alone which is a 20 percent reduction from the required payment under current law.

This reform was not perfect, no reform is, but it was good and I think we can be proud of the great leap forward we have taken toward ensuring a strong, fiscally sound future for the generations of Illinoisans to come.

PENSION REFORM DETAILS

The report prepared by Senator Brady and the Conference Committee on Senate Bill 1 makes major changes to the state’s public pension systems with projected savings of $160 billion, over 42% of all scheduled payments over the next 30 years. The measure, which was signed into law by the Governor on Thursday, should result in immediate savings of $1.2 to $1.5 billion in its first year.

With $100 billion in pension debt, Illinois has the worst funded pension system in the nation and the worst credit rating in the nation. The reform was an attempt to stabilize the systems and help assure that essential state services are not crowded out by unaffordable pension payments.

Additional Pension Change Details

Highlights of the pension changes included in Senate Bill 1 include:

·Fully funds the pension systems by 2044. Provides an additional $1 billion annually from 2020 onward. Allows the state to “prepay its mortgage” by devoting an additional 10% of the annual savings to extra payments. The cost savings are projections from a private consultant. The major credit rating agencies have indicated they will do their own analysis to verify the savings.

·Grants employees a 1% reduction in out-of-pocket employee contributions. This was designed to allow for a legal argument that employees were receiving additional benefits or “consideration” for reducing other benefits, such as their 3% annual cost of living hikes.

·Offers a guarantee that the State will meet its obligations to make its full pension payments by allowing the pension systems to file suit if the state does not make those payments. However, critics argued that the guarantee is weak because the General Assembly would have the power to change the funding formula that drives the payments.

·Reduces, but does not eliminate cost of living increases. Pension benefits will still grow. Targets these revisions so that those who have worked the longest and have the most modest pensions will receive the most protection. For employees not covered by Social Security (most teachers and university employees) the cost of living increase would be based on a portion of the employee’s salary equal to $1,000 for each year of service. For employees covered by Social Security (most state employees) it would be $800 for each year of service. The base amounts used to calculate the COLA would increase each year by the amount of inflation and would compound. The actual COLA would be 3% of that base amount.

·Creates an optional defined-contribution (401k) plan, which employees can choose to participate in. Employees would pay their regular pension contribution into the plan and the state would match that with an amount to be calculated by the individual retirement systems. No more than 5% of the employees in each retirement system could participate in the defined-contribution plan.

·Includes caps on pensionable salary that applies only those earning at least six figures. Cap applies to pensionable salaries above $110,000 and allows for the cap to grow at half the rate of inflation.

·Retirement age will not change for employees 46 or older. Younger employees will see staggered increases depending on their age. For example, those 40 years old would be able to retire as early as age 62, while those aged 31 would be expected to work until they are 65.

·Addresses past abuses in which persons were allowed to participate in the public employee system even though they were not public employees. This addresses a problem where highly-paid union bosses left their jobs to work full-time for the union, but were allowed to accumulate taxpayer-paid public pension credits.

·Removes pension benefits from collective bargaining. This would mean that a Governor could not offer higher benefits to unions as part of contract negotiations.

Busy One Day Session

Pension reform wasn’t the only issue during the one-day special session on December 3. The Senate spent time taking up several other important measures to help Illinois retain and grow business.

These included tax credits for multinational agricultural product processor Archer Daniels Midland (ADM), which has announced it is moving its headquarters out of downstate Decatur. Under House Bill 2536, the company will receive tax credits if it keeps its headquarters in Illinois but also creates new jobs in Decatur.

The company must maintain 200 full-time employees at its new corporate headquarters, must relocate 100 employees into Decatur from somewhere outside of Illinois within five years, must hire at least 100 new employees every year for five years at the Decatur location, and must establish an internal committee for five years that promotes jobs in Decatur. The bill passed the Senate and must now win House approval.